Ethanol Initiative Poses Both Risks, Rewards

Production of ethanol nationwide reportedly has more than doubled in the last five years and is expected to double again by 2010.

The Alliance of Automobile Manufacturers, a Washington trade and lobbying group, says there are 9 million alternative-fuels vehicles (AFVs) on U.S. roads today, and suggests 1 million will be sold this year and 2 million in 2008.

Of the existing AFVs, which include hybrid-electric and diesel-powered vehicles, the majority, 4.15 million, are flex-fuel vehicles (FFVs) that can run on E85, a blend of 85% corn-based ethanol and 15% gasoline.

This may come as a surprise to some, particularly those considering E85 vehicles but have yet to act due to lack of confidence in the relatively new technology.

Currently there are 19 E85-compatible models on the market: nine from GM, five from Chrysler and four from Ford. And more are on the way. Meanwhile, the National Ethanol Vehicle Coalition estimates there could be as many as 2,000 ethanol pumps nationwide by the end of the year, compared with 700 at the start of 2006.

To meet this demand, the production of ethanol nationwide reportedly has more than doubled in the last five years and is expected to double again by 2010. All of this suggests a booming industry, but is it?

E85 pump prices today are on par or exceed the cost of gasoline. Plus FFVs lose up to a quarter of the fuel economy provided by traditional gasoline-powered vehicles.

Nevertheless, experts say E85 leads the charge among biofuels, which in the U.S. can be derived from corn, sugar beet, soybean, wheat and barley. Biofuels are renewable, help lessen dependency on oil and send less greenhouse emissions into the atmosphere, a source of global warming.

But many questions remain: What are the implications of this boom for the automotive, agricultural and energy industries? How will domestic and international policies shape the biofuels market? And how significant will biofuels become over the next 10 and 25 years?

“There are a lot of uncertainties, a lot of risks,” says Gil Rogers, senior director of Global Insight’s international forum on global climate change and head of the forecasting group’s new study on biofuels that will kick off in October to examine these questions on a worldwide basis.

“The economic viability is so dependent on where gas and diesel prices go,” he says. “There’s a lot of impetus right now to look at biofuels, but oil prices change and that affects biofuels interest.”

Interest in biofuels influences government subsidies that could make E85 competitive at the pump. In turn, E85 demand would motivate farmers to grow crops to produce the fuels, eliminating the need for agricultural grants.

Future production of cellulosic ethanol made from switch grass, woodchips, algae, crop residuals, farm and municipal wastes holds great potential, as well, Rogers says, noting the wider the group of materials, the bigger the impact on the industry and the less negative affect on the food chain, including price inflation.

For the U.S., it boils down to a social tradeoff: The cost of biofuels infrastructure will remain high due to the capital investment and use of energy in its production compared with gasoline, plus subsidies to make it affordable to consumers could be taken from the highway trust fund.

But the upside is tantalizing. By 2030, Richards says, 25% of our petroleum supply could be met by biofuels vs. less than 5% at present.